The Labor Department released its monthly employment report last Friday, catching every forecaster off guard with a surprisingly weak number and prompting speculation about the health of the U.S. economy.
A mere 38,000 private non-farm jobs were created in May, falling far short of the 160,000 predicted by economists. This proved to be the weakest monthly increase in employment since 2010 and gave analysts plenty to worry about given the sluggish first quarter GDP growth of just 0.8 percent. Adding to the concern was a downward revision for the previous two months, knocking another 59,000 off of prior gains. The revision means that the economy has produced an average of 116,000 new jobs per month over the past three months, roughly half of last year's average gains.
Christopher HopkinsFor most of the period since the recovery began, relatively strong employment statistics have stood in contrast to an economy just above stall speed. Analysts have puzzled over the apparent dichotomy between tepid overall economic growth and robust job creation, with GDP expanding at a modest 2 percent clip but employment gains outpacing fundamentals. The latest labor report is worrisome in that the jobs numbers now appear to be waning rather than the economy waxing.
The unemployment rate declined substantially to 4.7 percent, a good number on its surface. But data underlying the unemployment rate continue to paint a mixed picture. The percentage of the civilian labor force actively employed declined to 62.6 percent, near an all-time low. Much of the decline in the unemployment rate can be attributed to the large number of adults who have abandoned the work force, voluntarily or otherwise. Over a half million American workers say they have left the labor pool because they are discouraged and are no longer seeking employment.
A closer look at the underlying numbers reinforces the concern. Health care was the leading contributor to new jobs, adding 46,000. Those jobs might be considered a proxy for quasi-government jobs, as most of the gain is attributable to the Affordable Care Act encouraging subsidized participants to increase utilization of services. Other government jobs added totaled 11,000.
Meanwhile, losses accelerated in domestic goods-producing industries like manufacturing, mining and construction, surrendering a combined 36,000 jobs.
Naturally, the question arises: why so puny?
Several possibilities have been offered. First, considerable month-to-month variability is inherent in collecting labor statistics. Economists refer to this volatility as "noise," and those reports contains lots of it. In particular, the ongoing strike at Verizon is responsible for a temporary loss of 37,000; this number will flip back to the plus column next month as the workers return.
The drastic reduction in capital investment in energy and commodity production has taken a huge toll on employment growth as those industries adjust to slower global demand and advances in technology. For example, the number of oil and gas drilling rigs in operation in the United States has plummeted from 1,900 in 2014 to around 400 today.
Uncertainty about future growth prospects is also weighing on hiring decisions. Employers are increasingly concerned about a potential slowdown later in 2016. And as November approaches, heightened discomfort with the negative implications of economic proposals from all three presidential candidates have convinced many business decision makers to move to the sidelines until the extent of the damage is known. Furthermore, the relentless buildup of regulatory drag is suffocating new business formation, a key source of job creation.
The U.S. remains the bright spot in an increasingly troubled global economy. But the latest jobs report with its prior revisions is flashing a caution signal for the Fed to consider at its upcoming meetings.
Christopher A. Hopkins, CFA, is a portfolio manager and vice president for Barnett & Co. in Chattanooga.